“There are two areas you should talk to experts on even if the war does not escalate over the next two weeks. Australia’s diesel shortage and Taiwan’s LNG shortage appear to me to be the first real breaking points in the global economy. Since the war started 10 year yields have gone up by 50bps and the negative correlation between U.S. government bonds and risk assets has broken down. If these do not reverse in the next two weeks you will see financial markets really begin to buckle. Markets really move not when people want to buy or sell, but when they need to.”
~ Name Withheld
The 10-year has not moved 50bps but it was over 40bps (less after huge bond rally today), and there normally would be a correlation between risk-off and bond yields dropping. However, the problem with his assessment is that the 10-year moved … to a whopping 4.4% – the average it has been for about four years now!!
That financial markets break when there is forced selling is a tautology. And there has not been much forced selling, yet. But if the question is, “if markets drop further will there be forced selling and is forced deleveraging bad?” the answer is … yes. But whether or not we get there and when and how severe it is if we do are all the actual operative questions that no one knows the answer to.
Most of Australia’s damaged production capacity is only relevant to their domestic needs, according to all the research I have done. The impact at Wheatstone is primarily about their LNG production and all limits around global LNG production have been a boon for (a) U.S. LNG exporters, and (b) Russia.
